Is The P2P Lending Sector Ready To Withstand An Economic Slowdown?
The P2P lending market has seen a quick rise over the past decade. Intermediary platforms that take cash from those investing online and channel it into loans to businesses, property developers and even individuals sprang up in response to the drying up of traditional bank lending.
It was a win-win. Seemingly perfectly good business plans were failing to secure loans from banks due to a combination of them being forced to strengthen their balance sheets and new, strict lending criteria. Even individuals with solid credit ratings were also struggling to take out consumer loans. On the other hand, with interest rates at historic lows, savers were seeing their cash holdings lose value with inflation rates higher. Instead, they could put part of their savings into P2P loans and achieve interest rates in the high double figures.
And default rates were very low with P2P
The government even got in on the act by introducing the Innovative Finance ISA last year. You can now invest through regulated P2P lending platforms tax free. The healthy development of the sector has already seen Funding Circle, one of the biggest UK P2P lenders, go to IPO last year achieving a valuation of £1.5 billion. Another, Lendinvest, which
However, those cautious on the new sector have always maintained that P2P lending will only be really tested as a model when an economic slowdown hits. It’s all very
Concerns have already been raised about one P2P lender – Lendy. The company started out as a specialist in marine finance before pivoting towards funding property development. But there have been reports that as many as two thirds of its outstanding loans had fallen into arrears at some point last year. That’s already reduced the interest
The concern is that as well as the big, well-run P2P lenders such as Zopa, the first to enter the market, and Funding Circle, the success of the sector has attracted a phalanx of smaller operators such as
Zopa chief executive Jaidev Janardana recently said that the company judges Brexit uncertainty and a slowing economy means there has been a 15% rise in the probability of P2P borrowers defaulting. Government statistics also show that in Q4 of 2018 the number of Brits declared insolvent rose to 34,000. The total annual figure of 115,000 was 16% higher than in 2017 and has moved above figures over the aftermath of the financial crisis.
For those investing online, particularly those careful about their selection of a P2P lending platform and spreading their risk between numerous lenders, the sector still represents an attractive higher risk option for a portion of their investment capital. But the sector is bracing itself for its first real test and increased caution is to be advised.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.